Transcription
S&P 500 hedges are in the 75th percentile versus the 50th percentile. There's a lot of very important updates that I'm going to discuss about this choppy market in this video. Here's a short summary because I respect your time, and I'll keep it short.
First, growth stocks have pulled back to more attractive levels. For example, Palantir went from 80 to 64. Second, January volatility is normal; however, it's completely uncomfortable.
Number three, the California situation is actually very concerning for me because the damages are absolutely astronomical. That's going to affect insurance companies, and that's going to come out of everyone's pockets, not just California's.
Fourth, I want to make a quick statement about hedging in this video. You'll see later. So with that out of the way, Amy Wu, RBC Capital Market head of derivatives, aka head of option strategy—that's what a derivative is, it's an option—she had a very good explanation on market volatility. The viewpoint that she had is absolutely unbelievable, and it didn't get any attention.
So I want you to watch this quick 60-second clip because the way she puts this is absolutely genius. To some degree, Frank, that's normal; that's seasonal. This is just what we see in January, which is some growth in volatility and a selloff in the market. You've seen that every single January for the last decade, so it's not surprising that you're getting a little bit of this this January as well.
All right, so according to your data, the jobs report actually added to some of the angst out there on the market. So you say before the jobs report, S&P hedges were in the 50th percentile; now they're in the 75th percentile. Give us that in plain English. What does that mean about sentiment in the market?
Exactly. A really simple way to think about that was after that blowout jobs number, I think people just had to rejigger their framework. If they had expectations for multiple rate cuts this year, a lot of that was pulled back. Our own rate strategist actually thinks we're more in the camp potentially of hikes coming up this year.
So, really different change in framework, and what that's done is made people evaluate how much upside is left in the S&P. Are we at valuation levels that are perhaps nosebleed? And could it pay to have a little bit of hedges at this point in time?
Now, Silverman recommended buying puts on QQQ. QQQ is essentially the NASDAQ ETF; it has all the NASDAQ stocks within it. She's recommending to hedge by buying put options, and she said to do it later on in the video, which I didn't show, for February and March to hedge against volatility and protect positions in the Magnificent Seven stocks. You guys know which ones those are: it's Apple, Google, Microsoft, and so on and so forth. Tesla's included in there, and Nvidia.
Now, look, hedging by buying put options is something that I would say is a viable strategy. Here's what you have to know. First of all, hedging is not a guaranteed way to make money. Hedging reduces overall exposure in the market, and hedging costs money.
Okay, so if you want to hedge, a hedge just means that if the market goes down, you won't lose as much money as the market. Look at it this way: I mentioned beta in my last video. Beta is how much a stock moves up and down. For example, Palantir has a three beta, so when the market falls 5%, Palantir falls 15%.
If you have a purely market-exposed portfolio with a one beta, that means when the market falls 8%, you're going to lose 8%. You're going to move with the market exactly. A hedge will reduce your beta; it will reduce your exposure. So if the market falls 8% and you have a 50% hedge in your portfolio, you're only going to lose 4%.
So that's what a hedge is. Now, keep in mind that when the stock market goes up, depending on the strategy that you use, you guys know that I teach option strategies on this YouTube channel. I'm teaching safe passive income and option strategies. Certain option strategies will limit your upside; other option strategies, like buying put options, don't limit your upside, but they straight up cost money because you're purchasing insurance.
So if you're a high-net-worth individual—which is, you know, I do work with a lot of folks that have six-figure portfolios, and I do a lot of one-on-one coaching with seven-figure portfolios—if you are high-net-worth and you have fear in this market and you really want to protect yourself, then you need to decide one of three things.
Okay, in terms of hedging, you can hedge heavy, you can hedge medium, you can hedge light. Hedge light would be basically, let's say you have a $150,000 portfolio. You would buy, you know, one Nvidia put option, one QQQ put option, one Palantir put option. That would be light.
Two, what I've been doing in my portfolio—and I showed you guys in my last Palantir video, you can check that out—is I've been hedging very well on Palantir. Actually, as Palantir has fallen down, I've made $20,000 as the stock fell down by just selling in-the-money covered calls. Okay, that's like a medium way of hedging.
Heavy hedging would basically be buying lots of put options. So you buy a ton of put options; you know, you buy practically your entire portfolio in put options. Not 100%. What I mean is, when I say this, it's very important for you to understand. I don't mean your entire portfolio in put options; that's going 100% as a bear.
What I mean is, let's say you have $150,000 of exposure. You have, like, you know, worth of Nvidia stock, which is a thousand shares. Okay, you would buy 10 put options to perfectly hedge all of your shares. So if you have a thousand shares and you're worried about all a thousand, you don't want to sell, you don't want to pay the taxes on your gains, you want to really lock in your gains.
That's why put options were made. That's what a hedge fund was made for; it was made for preserving capital. And that's the conversations that I'm having right now in my coaching. A lot of my clients are asking me, "Is this a market where I want to hedge, and how do I protect myself? I want to preserve my wealth right now."
Because, you know, Henry, with the coaching that I've had, we've made tons of money, but now it's time to protect. I've had students that made $500,000 in the last week; they lost $100,000. Right? They've lost, you know, one-fifth of their gains because they're in the high beta risky stocks.
So what I would say there is, again, you have three choices: light hedging with some put options, by buying some put options; medium hedging, which is my approach right now, which I'm doing covered calls across my entire portfolio; heavy hedging is just not my style. If you want a heavy hedge, then I personally think that you don't have the guts to be a good investor, so I'm not even going to talk about heavy hedging in full detail.
Look, when it comes to protecting gains, it isn't a bad idea if you don't mind paying insurance. Okay? When you buy a put option, you know, some of these put options will go for about 1% to 2% of your account value. So if you have a 30% gain, you don't mind paying 2% of your accounts in, you know, some put options, then it's really not a big deal for you in the long term because you're giving yourself peace of mind in the short term.
So, like I said, I do prefer covered calls on Palantir and every single other stock that I have right now. Tesla included, I've sold 450 covered calls for March expiration for Palantir. I also have February 21st expiration, if I'm recalling. Just across the board, I have covered calls on every single thing.
Now, you know, last month I was telling you guys we have more momentum, and before you know, Christmas came, yeah, I was riding a lot of stocks to the upside. But now that I see a lot of stocks, you know, they look like they're peaking. We see that the volatility is normal in January. I can't predict the future; I can't do that whatsoever, right? So I'm not going to even pretend that I can.
So I'm hedging. And, you know, just looking at people's account value, yeah, it's down. But here's the important thing: when people have a down account value, that's not actually what the problem is. The main goal why we're investing in options is we want cash flow.
So right now, I'm making plenty of cash flow. Actually, with a height in volatility, option premiums have actually increased. So there's no problem at all as long as you're making cash flow in a bear market or a correction, which we're not. We're in neither of those, by the way. It's not a problem; it's all about cash flow.
So once things do go up again, your stocks will appreciate in price again. So your stocks that are down now maybe will appreciate again, and it's not a problem as long as you're making cash flow in this market. You know, while there is some volatility, Palantir fell from 80 to 64. Like, what an opportunity! Everyone was begging Palantir to be cheaper because they wanted to buy it, and then you guys got the wish.
We all got our wish that Palantir went down, and all of a sudden, nobody has interest in it. It's like a married man; everyone wants the married man. He goes through a divorce, and now no woman wants him anymore. That's like the female psychology in many ways.
And that's like us. Many of you guys are men. When stocks fall down, you guys become absolute wimps. You're like, "I'm scared." Come on now, this is an opportunity! Not "I'm scared." If you actually believe in the stock long term, you understand what a company like Palantir does or any stock.
I don't get paid or promoted for Palantir; I don't care. It could be Nike, it can be Kraft Heinz, it could be Apple, Walmart, Nio. There are a lot of good stocks right now that are good valuations, and they're becoming very good valuations. This is an opportunity.
Of course, my clients see a dip in the account value, but it's all about income right now. It's all about income. As long as we can have good income, then it's all good, right? The account value doesn't matter. Just like the value of your house doesn't matter if you're purchasing a property to rent it out. You care about what the rental income is, not necessarily the property value.
Okay, so you have to have a long-term view. If you don't have a long-term view, you have a short-term view, then you're just a gambler. I mean, go hit up the casino, boss. Just go to the casino, bet on black, do some roulette. All right, have fun at the casino because if you don't have a long-term view in the market, I mean, listen, then you're just kind of gambling.
I feel like you got to stop complaining. I feel like I have a lot of people—I'm not saying this is you specifically—but I've seen a lot of folks complaining nowadays that the market has had a pullback and that the market, you know, it's not like it used to be or something.
Listen, if you can't handle this small pullback, you definitely shouldn't be investing because this small pullback is absolutely nothing. Like, have you seen 2008? Have you witnessed the 50% pullback? This is absolutely nothing—literally nothing.
Okay, a real crash? You would crap your pants. Like, I'm sorry to say it this way, and I'm sorry to make this video a little bit different, but I really want to point out the perspective that I have here. I feel like a lot of investors are just absolutely out of understanding what reality is—that pullbacks happen and what real crashes are.
Because I'm telling you, a real crash? That's when you know that's tough times.
Okay, so what does make me concerned, though, is the California fires because that is a lot of economic damage. Now, that damage is going to be a big deal because insurance companies have to pay out. Now, they won't be insuring anymore, but the damage is done.
By the way, it's some stupid stuff that happened. I won't even give you my opinion. California focuses on the complete wrong things. They're focusing on some BS completely versus just having some water. All right? They just focus on the wrong priorities. Absolutely.
Like, this was pretty preventable. California has a fire every single year. Can't you kind of be more prepared for it? Have some water in your fire hydrants? They have other things that they're focusing on that they think is more important.
But nonetheless, the economic damage is huge, and the whole of America is going to be paying for this. Looking back in 2005, when Hurricane Katrina happened, there were a lot of infrastructure vulnerabilities, and that was a catastrophe that you definitely couldn't really predict.
Right? Hurricane Katrina was massive. That caused a lot of damages in the stock market. It didn't have such good performance for a period of time. And then COVID-19, you know, back in 2020, the market crashed. You know, there was also definitely some volatility.
Again, neither of those are the case right now. But California will be a bit of an issue and will be a hit on the economy. But at the same time, maybe it's planned. I hate to be a conspiracy theorist, but maybe it's planned for economic reasons.
The government could just say, "Hey, you know, we're going to make money off of this," just like they make money off of war. Unfortunately, but guess what? In both situations, nonetheless, the stock market recovered, and the market did very well.
So listen, hedge if you need to. Look at my Discord and look at the hedges that I'm making. I'm hedging on every single stock. I think that would be a good perspective for you guys. That's always the first link.
But I think hedging just makes a lot of sense. Tech companies, particularly large-cap ones like the Magnificent Seven—you know, I said Apple, Microsoft, Alphabet, etc.—they have grown to represent a significant portion of the major indices.
Guys, those Magnificent Seven make up like 20% or more of the S&P 500. I don't have the data in front of me right now, but the S&P 500 and NASDAQ have huge positions, huge weighting in the Magnificent Seven.
So, you know, I think it does make sense to hedge, you know, small or medium, not big. And these ETFs and the S&P 500, NASDAQ, their performance heavily influences the overall market direction due to their high-weighted amounts.
However, there's nothing that you can do because if you avoid being in these stocks, investors who exclude or underweight tech honestly risk missing out on substantial market gains. By just missing, for example, a few good days in a year, you will literally miss like 30% to 50% of the results of the entire year's gains.
Because I've seen it so many times, and that's just the fact of the matter. Losing a few good days could be three to four days; you miss 12%. Guess what? The market only goes up 10% to 15% per year. I know, shocking low, right? By missing three to four good days, your entire year is busted.
So I would recommend, or I just want you to be aware of that fact in general. I don't even know if I would need to recommend anything; I just want you to be aware of that. Investors who simultaneously hedge their portfolios against potential tech downturn while maintaining exposure to capitalize on growth are going to be the smartest investors.
If you perfectly hedge and sell your positions or get out of your portfolio and you become a market timer, you're basically just a gambler. You do need exposure; otherwise, you can't really experience any further gains.
So the most important thing that you need to do right now is have a level head. Don't get overly emotional. Understand that the stock market is still the best wealth-building machine.
I can't predict the future; I'm not going to pretend that I can predict the future. But I'm going to keep giving you objective facts, and I myself am very confident that I'm going to outperform and adjust to this market very easily. I'm going to outperform in 2025.
So if you want outperformance with me, subscribe, and I'm going to have more videos for you guys. Objective truth on the facts of what works in the market: hedging the market, buying proper stocks, buying good stocks for a good valuation, growth stocks, option trading in general, and creating passive income.
So if you want outperformance, subscribe, and I'll catch you guys in the next video.